Carlsberg

Battling brewers

Carlsberg is about to learn whether it can play a part in restructuring Europe’s brewing industry

IN THE next few weeks, an apparently routine announcement will emanate from the headquarters of Carlsberg, a Danish brewer whose beer brands are among the world's oldest. It will reveal that the Carlsberg Foundation, a trust that owns 55% of Carlsberg's shares, intends to reduce its holding to below 50%. Carlsberg will then be able to join the restructuring and consolidation of the brewing industry now going on—and one of Europe's sleepiest, most bureaucratic firms will have shown how fast the continent's old companies can move when they have to.

The brewing business is in flux. Danone, a French food group, has said that it might sell its Kronenbourg beer brand, thought to be worth around $1.5 billion. Bass, a large British brewer, is splitting itself into two and trying to sell its £2 billion ($3.2 billion) brewing operations, so as to concentrate on hotels and leisure. Last week Heineken of the Netherlands, Europe's biggest brewer, said it was interested in buying something. At the same time, Anheuser-Busch, America's largest brewer, and South African Breweries are both prowling. And Britain's Scottish & Newcastle is also said to be shopping for a deal, perhaps to add a strong lager brand to its existing beer portfolio. But Carlsberg, which had a proposed merger with Bass rejected by competition authorities in 1997, has so far been notably silent.

Carlsberg still has a 70% share of its domestic market, but in recent years it has been under pressure from declining consumption and from smaller rivals who have chipped away at its dominance. It also has a soft-drinks operation which, via a joint venture, includes responsibility for sales of Coca-Cola in the Nordic market. Both the brewing and soft-drinks arms have had problems, especially with distribution, after a bungled effort by Carlsberg two years ago to revamp its operations. The managers of the Danish business were replaced a few weeks ago.

Abroad, things have gone even worse. More than 90% of Carlsberg's profits come from Western Europe, the bulk of them from Scandinavia and Britain. Its investments outside Denmark have been either in small markets or in the form of equity stakes that are too small to give it effective control. It recently lost its distributor in Spain, which was sold to Heineken. In America, where Heineken is strong, Carlsberg is weak. The Danish firm's distributor, Interbrew, distributes its own competing Stella Artois brand.

Carlsberg has belatedly decided to sell its stakes in Royal Copenhagen, a china business, and the famous Tivoli gardens, as well as a few smaller investments. These disposals could raise some DKr4 billion-6 billion ($520m-775m), enough to clear the firm's debts, but not enough to arm it for a large takeover.

The markets have taken note of Carlsberg's struggles. Over the past year, its shares have tumbled by 21%. Pre-tax profits for 1998-99 were DKr1.63 billion, 27% lower than in the previous year. Although profits should recover this year, analysts say that it is unlikely that Carlsberg's strategic difficulties will be easily overcome: unless, that is, the foundation's lock on the firm's equity can be removed.

The foundation, which supports science and the arts in Denmark, was formed in 1876 by J.C. Jacobsen, the brewer whose meticulous research had led to the creation of Carlsberg and its successful pioneering of high-tech beer production. In 1970 Carlsberg merged with Tuborg, and the foundation took its modern form, which includes a legal requirement to hold at least 51% of Carlsberg's shares.

Late last year, Carlsberg admitted that it had decided to review the foundation's structure. Egged on by Carlsberg's managers, lawyers have been poring over covenants seeking ways around the ownership requirement. The company has been tight-lipped about this process (it declined to speak to The Economist). But analysts and bankers familiar with events say that it should be only days or weeks before Carlsberg takes the next steps towards freeing itself from the foundation's control.

Any change to the trust requires agreement from a Danish government commission that is charged with overseeing civil law. On the face of it, it seems difficult to justify altering the terms of a trust. However, there is a general acceptance in Denmark that this represents the only way Carlsberg can hope to prosper in future. Remarkably, the commission is expected to wave through whatever the foundation's trustees send it for approval.

You might expect Carlsberg's workers to oppose the change: a future merger could threaten jobs. But a representative of the workforce says that so many jobs have been cut in recent years that, as far as the employees are concerned, the management has already done its worst. In 1985, for instance, Carlsberg had its own and a Tuborg plant in Copenhagen, employing 3,600 workers between them. Today 420 staff service the sole remaining Carlsberg brewery. Freeing managers to merge or make a takeover may be an alarming prospect, but the alternative looks even less palatable.

European firms often seem resistant to change. But Carlsberg has got the politicians and the workers on its side to rewrite the law to give it a chance to compete.